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Millennials are good at saving. But investing? Not so much

Posted: 11:47 AM, Mar 19, 2018

Updated:2018-03-19 17:47:27Z

By:
Nerd Wallet

A number of new studies indicate millennials are generally doing a great job stashing money for the future. But some of those studies also show that they’re wary about investing those savings in the stock market.

This could hurt them in the long run. Investing in the stock market is a powerful way to grow your money for your long-term goals — more on that below. But first, the good news.

Millennials are indeed saving

Although organizations vary in how they define the millennial generation, it broadly encompasses those born in the 1980s and 1990s. Looking at several studies paints a picture of their general habits:

71% of millennial workers are saving for retirement, either in a workplace plan or outside of work, and the median age at which they started saving was 24, younger than Generation X’s median starting age of 30, according to a Harris Poll conducted for the Transamerica Center for Retirement Studies.

Fully 39% of millennials are defined in Transamerica’s survey as “super savers” — they’re saving more than 10% of their salary. That’s close to the 15% experts often recommend.

Millennials are on track to replace 78% of their estimated retirement expenses, according to a 2018 Fidelity survey. That’s a healthy rate. (Here are tips to help you figure out how much you’ll need in retirement
.)

About one in six millennials have saved $100,000 or more, according to Bank of America’s Better Money Habits survey.

But investing has millennials a little spooked

Now the bad news:

42% of millennials are investing conservatively, compared with 38% of Generation X investors and 23% of baby boomers, according to the Fidelity survey.

Millennials held 25% of their investments in cash, compared to 19% of investors overall, according to a Charles Schwab & Co. study of client data.

20% of millennials say their retirement money is invested mostly in bonds, money market funds, cash or other stable investments, compared with 15% each for older generations, according to Transamerica.

66% of people aged 18 to 29 (and 65% of those 30 to 39) say investing in the stock market is scary or intimidating, compared with 58% of those aged 40 to 54 and 57% of those 55 and older, according to an Ally Financial survey.

So, what’s the problem?

It’s no surprise that investors who came of age during the 2008-09 financial crisis would hesitate to embrace the stock market — the S&P 500 lost about 57% of its value between October 2007 and March 2009, when the oldest millennials were in their late 20s.

The problem is, some millennials may be putting their retirement security at risk by shying away from stocks now. Consider that the S&P 500 averaged a 7.92% return from January 2007 through December 2017, adjusted for inflation and with dividends reinvested — and that time period includes the financial crisis. By comparison, the average annual return for money market bank accounts hasn’t topped 0.3% in the past eight years.

Of course, it’s difficult to generalize across a generation that includes about 71 million people (that figure is according to Pew Research Center, which defines millennials as those born from 1981 to 1996). Plenty of millennials are making smart financial decisions, says Meir Statman, professor of finance at Santa Clara University and author of “Finance for Normal People.”

“On the one hand, you have really great awareness on the part of millennials of the need to save for retirement,” Statman says. But, he adds, many people “are still scarred by the financial crisis.”

Put risk in perspective

For people nervous about investing, the key is to put stock-market risk in perspective, Statman says.

“The risk of the stock market is not the biggest risk in life,” Statman says. Every time you make a decision — whether it’s your career choice, whom you’re going to marry, where you’re going to live — that decision entails risk, he says. Maybe your chosen profession will become obsolete, or you’ll choose a partner who isn’t right for you.

“Taking risk is not a luxury; it’s a necessity,” Statman says. “If you look at risk in the overall context of life, you see that we take risk not because we like risk, but because we have aspirations. Aspirations are the engine, the driver of the train, and risk is really one of the cars of the train.”

Others agree that millennials shouldn’t necessarily run from stock-market risk. “Millennials have to be smart about risk. But they also have to be comfortable with the idea of some risk, at least in the short-term,” says Jason Kirsch, a certified financial planner, founder of investment advisory Grow, and author of “The Millennial Advantage: How Millennials Can (and Must) Be the Next Great Generation of Investors.”